September 17, 2013

At the SEC, No Admit, No Deny Lives On

J.P. Morgan Chase & Co. may be required to admit wrongdoing to settle U.S. Securities and Exchange Commission charges over its "London Whale" trading losses, but the agency today made it clear that no admit, no deny settlements are still the norm.

The SEC announced it settled 22 cases with firms accused of short selling, and each settlement contained the same language: the respondent agrees to settle “without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings.”

Enforcement Division co-director Andrew Ceresney in a news release said that the settlements, which resulted in more than $14.4 million in monetary sanctions, send “the clear message that firms must pay the price for violations while also conserving agency resources.”

The key phrase: conserving agency resources. Companies are loath to admit wrongdoing to the SEC for fear of opening the door to follow-on private litigation. As a result, companies may prefer going to court rather than agreeing to a settlement containing an admission of misbehavior.

The agency’s longstanding practice of accepting no admit, no deny settlements, however, came under fire in late 2011, when a New York federal district judge, Jed Rakoff, refused to sign off on a $285 million deal between the SEC and Citigroup.

“An allegation that is neither admitted nor denied is simply that, an allegation,” Rakoff wrote then. “How can it ever be reasonable to impose substantial relief on the basis of mere allegations?”

SEC Chairman Mary Jo White made waves in June when she said at a conference that “we are going to in certain cases be seeking admissions going forward. To some degree, it can turn on how much harm has been done to investors, how egregious is the fraud.”

The conduct alleged in the settlements involving short sales did not appear particularly egregious at all. In fact, the SEC in its news release took pains to point out that the regulation at issue—Rule 105 of Regulation M prohibiting the short sale of an equity security during a restricted period—“applies regardless of the trader’s intent.”

J.P. Morgan Chase’s high-profile London Whale case, however, is another story. The trader, Bruno Iksil, lost $6.2 billion on credit default swaps. As Senator John McCain (R-Ariz.) said earlier this year, the bank "gambled away billions of dollars through risky and exotic trades, then intentionally hid its losses from investors and the public, showing complete disregard for risk management procedures and regulatory oversight.”

Both White and Ceresney are recused from the case because of work they did at Debevoise & Plimpton on the bank’s behalf.